Tax fight looms large in Energy Future restructuring
By Nick Brown and Billy Cheung
NEW YORK (Reuters) - As Energy Future Holdings prepares for what could be one of the largest-ever U.S. bankruptcies, some of its private-equity lenders are pushing a breakup of the company that could reap them more than $1 billion in tax savings, two people close to the matter said this week.
But such an arrangement could provoke a challenge from the U.S. government, since it would result in a multi-billion-dollar capital gains tax bill that the bankrupt entity is unlikely to be able to afford.
Earlier this year, in an unusual move, the company and the lenders reached out to the Internal Revenue Service seeking its blessing on the proposed structure, according to the sources, who refused to be named because talks are private. The agency declined to rule because the plan is not official, they said.
Barring any last-minute deals, which several people close to the matter say is unlikely, the dispute over the tax issue will come to a head in bankruptcy court. Energy Future is expected within weeks to receive an auditor's opinion that it cannot survive as a going concern, which would trigger a default on its loans. The people close to the case expect the company to file for Chapter 11 as soon as this month to avoid the default.
Energy Future, formerly TXU Corp, was created in a 2007 leveraged buyout by a consortium including KKR & Co (KKR.N: Quote), TPG Capital Management TPG.UL and Goldman Sachs' (GS.N: Quote) private equity arm. The deal loaded the company with more than $40 billion in debt shortly before low natural gas prices made its coal-fired plants noncompetitive. A breakup would split its unprofitable generating unit from its regulated distribution business.
The lenders, which include Apollo Global Management (AINV.O: Quote), Oaktree Capital Management and Centerbridge Partners, have more bargaining power than any other stakeholder. With more than $20 billion in loan debt at the company's generating unit, they are by far the largest creditor faction.
Under the lenders' vision, Energy Future's subsidiaries would be sold to the highest bidder, with existing creditors having the right to bid using the face value of their debt. Since that value is higher than the tax value of the assets on the company's books, the so-called credit bid would let the buyer revalue the assets' tax basis, a method known as a step-up, and save money on future taxes.
Such a transaction would also leave a massive capital gains tax liability at the Energy Future parent, which is not expected to have the money to pay it. Continued...